Oracle’s Upside from Suing Google

July 6th, 2011 by Trefis Team
+11.90%
Upside
116
Market
130
Trefis
ORCL: Oracle logo
ORCL
Oracle
Android Ad Revenue

Source: Forbes, Trefis

Oracle (NASDAQ:ORCL) filed a patent infringement lawsuit against Google (NASDAQ:GOOG) in August 2010 over the use of Java in Google’s Android mobile operating system and is claiming billions in damages from Google. [1] The latest filing by Oracle reveals that Oracle is demanding $900 million to $1.4 billion up front as well as 15% of the advertising revenue that Google earns from advertising on phones that run the Android OS.

We have a $37 price estimate for Oracle, which is around 10% ahead of the current market price.

Advertising on Android: A Billion Dollar Business

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While Oracle’s demands are not as audacious as reported earlier ($1.4 billion to $6.1 billion), they still amount to a huge number considering that the ad revenue Google earns from Android devices is expected to be close to $1.3 billion in 2012. [2] Oracle claims that Google’s use of Java in Android infringes a patent which it acquired through its acquisition of Sun in 2009.

 

Potential 25% Upside for Oracle Stock

While far from certain, if Oracle won this case against Google, its cash reserves would get a $1.40 billion boost ($0.28/share) and its Java licensing revenues would receive 15% of Google’s Android ad revenues. We estimate Google’s ad revenues from the Android platform will  increase significantly in the next couple of years touching $1.3 billion in 2012 and reaching $26.4 billion by the end of the Trefis forecasting period.

Oracle’s 15% cut would boost its Java licensing revenue by almost $4-5 billion by the end of the forecasting period based on forecasts. Taking these factors into account, if Oracle wins the lawsuit, we would revise the Trefis price estimate upwards from $37 to $41.20, implying a 25% upside from its current market price. Even in the event of a settlement for a lower amount, Oracle could still see meaningful upside.

You can tweak the chart above to check the potential upside.

See our complete analysis of Oracle’s Stock

Notes:
  1. Oracle Opposition to Google Daubert Motion, Oracle, June 28, 2011 [↩]
  2. Google’s Android: A Billion-Dollar Ad Business In 2012?, Forbes, February 8, 2011 [↩]